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Fully offset loan - structure?

Discussion in 'Property Finance' started by @bris_nth, 19th May, 2016.

  1. @bris_nth

    @bris_nth Member

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    I have a theoretical scenario to propose for our new loan, just wondering if there's any considerations or structures worth looking in to, or if its a disaster waiting to happen.

    We're about to purchase a PPOR with a mortgage of approx $550k. Say I have a family member who has some spare cash which they are willing to park in our offset (the loan amount will be fully offset) with the intention that we split the difference between their potential high interest savings rate and our variable rate.

    Of course I've suggested they look at other investments, but they want to keep the cash very liquid so they are keen on looking into the viability of this arrangement.

    My intention would be to have 2 x offsets, one for their cash so that it remains completely untouched and another for our own savings. I'm assuming this would help manage the calculation of interest earned too.

    Are there any traps, taxation issues or problems you can see? I feel slightly uneasy about this, but can see there been benefit for both of us.

    Some potential issues I can think of:
    1. I would be paying their portion of interest earned from my own cash flow
    2. I could potentially miss the boat on fixing at a low interest rate, depending when they remove the cash.
     
  2. Marg4000

    Marg4000 Well-Known Member

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    Probably need legal advice. What if someone dies?

    Can you have two offsets on the one loan?

    Maybe cash flow problems. You will still have to make the loan repayment plus the interest on the amount in the offset.

    Loan would have to be well documented, they would have to pay tax on the interest you pay them.
    Marg
     
  3. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    You'd be surprised at how often we see this scenario.

    From a lending perspective it's not a big deal. As you say, have two offset accounts so you can keep the third parties money separate from your own.

    One catch is that most lenders only allow one offset account per loan. The simple solution is to set up a split loan with an offset account against each split. The benefit here is the periodic statements will usually tell you how much interest has been saved.

    A few lenders have a primary offset account under which you can set up 'sub accounts', all against the same loan. This keeps down the number of accounts and makes management of the whole thing very simple, but I'm not sure if you'll be able to break down the savings as easily.
     
    Last edited: 19th May, 2016
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  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Marg is right - many legal issues. They should see a lawyer to protect themselves. The loan needs to be properly documented in case of death or incapacity of either party. They should also consider the asset protection aspects. They would be usecured creditors unless they lodge a mortgage.

    Also tax aspects - they would be taxed on their interest.

    Social security aspects too if any pensions now or future.
     
  5. @bris_nth

    @bris_nth Member

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    Thanks for the replies.

    I've done some calculations and I'm not sure it's worth the risk. I would be tying up a significant amount of cash flow to pay out their interest component with a relatively minor net benefit to myself.

    Cheers,

    Pat.
     
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  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  7. @bris_nth

    @bris_nth Member

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    Awesome! Thanks Terry, great post!
     
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